This could be the dumbest question ever asked but I think it is quite confusing for a Java newbie.
I really like the explaination from SCJP Sun Certified Programmer for Java 5 Study Guide.
To make Java more memory efficient, the JVM sets aside a special area of memory called the "String constant pool." When the compiler encounters a String literal, it checks the pool to see if an identical String already exists. If a match is found, the reference to the new literal is directed to the existing String, and no new String literal object is created.